Fed’s Rosengren: balance-sheet reduction can start ‘relatively soon’

Eric Rosengren, president of the Boston Fed, has added his voice to the chorus of policymakers who say they are prepared to start the process of unwinding the central bank’s massive balance sheet.

“In my view that process could begin relatively soon, and should not significantly alter the (Federal Open Market Committee’s) continuing gradual normalisation of short-term interest rates,” Mr Rosengren said, according to prepared remarks delivered on Wednesday at the Hyman P Minsky Conference at Bard College.

By retiring a small portion of maturing securities while gradually shrinking the volume of securities being reinvested, “the tightening of short-term interest rates should not need to be much different than it would be in the absence of shrinking the balance sheet,” he said.

Mr Rosengren said that the use of central bank balance sheets to combat economic downturns would “quite likely” be necessary in the future, particularly given the limitations of relying on short-term interest rate reductions during recessions.

The Fed had previously forecast raising interest rates as many as three times this year, and it already pulled the trigger on one of those in March.

Minutes from the Fed’s last meeting in March indicated that most members of the policymaking Board of Governors expect the central bank to begin reducing the size of its $4.2tn balance sheet by the end of the year. The balance sheet grew from $750bn at the end of 2007 to $4.2tn at the end of March 2017, reflecting the Fed’s bond purchases under quantitative easing, designed to lower yields and boost the economy.

Mr Rosengren serves this year as a non-voting member of the FOMC.